Cell Phones Without Factories: A Conversation with Tyler Cowen on International Economic Development

Senior Fellow for Global Health, Economics, and Development, Council on Foreign Relations

Until recently, the common presumption was that economic globalization would increase and lower-income countries would follow the same path to development that wealthier nations had. This may not be the case. Many developing countries are deindustrializing and their manufacturing employment is either falling or appears to have peaked early. International trade has flatlined and prospects of export-driven growth may be declining with improvements in smart software, robots, and 3-D printing. Is there another path to economic development and reduced inequality?

Tyler Cowen, Holbert C. Harris Professor of Economics, George Mason University, discusses the prospects for a “cell phones instead of automobile factories” model of economic growth and prosperity as part of the Global Health, Economics, and Development Roundtable Series.

THOMAS BOLLYKY: Terrific. Welcome to “Cell Phones Without Factories: A Conversation with Tyler Cowen on International Economic Development.” Thanks to you all for coming.

For nearly two centuries, manufacturing has been the ladder on which the world’s poor have climbed out of poverty. From the textile mills in Lancashire to the steel mills of Pittsburgh to the smartphone assemblers of Shenzhen, economic development has traditionally been manufacturing-led. It has been enabled by trade, providing raw materials in large export markets overseas with elastic demand. This had been particularly true in more recent years as lower shipping costs and supply chains have enabled poorer nations without a deep industrial base to engage in the global economy by participating in stages of manufacturing or by producing intermediate services. That growth model has enabled less-developed nations like Vietnam or Bangladesh or Indonesia or of course China to lift hundreds of millions of people out of abject poverty.

This, however, is changing. You may have heard mentioned in passing in the U.S. presidential election that U.S. manufacturing employment is declining. That proportion of the U.S. workforce in manufacturing peaked around 27 percent in the 1970s. It’s been falling since. It’s now about 7 percent. What many people don’t realize is that manufacturing employment is also declining in many developing countries as well, having peaked at rates closer to 15 percent and at a much lower stage of economic development.

This is in part happening because of improvements in manufacturing technology and automation are allowing manufacturer—are making manufacturers less dependent on labor costs, which is allowing them to move manufacturing closer to home and to shorten supply chains. Less-developed nations could move into services, but that’s an area rife with protectionism, and the election results in the U.S., U.K. and Europe do not suggest that this is an opportune time for ambitious trade liberalization.

So what are—what are the consequences of these changes? What is the path left open to lower-income nations for development? What changes in global governance have to occur to allow nations to pursue it?

Today we’re deeply fortunate to have Tyler Cowen here to help us think through these issues. He is the Holbert C. Harris Chair of Economics at George Mason University and the Chairman of the Mercatus Center. He is the co-author of my favorite blog, “Marginal Revolution.” If you’re not reading it, you really should be. It’s fabulous. Often the best reading I’ll do in any day are the materials I find on there. He is the author of several terrific books, including one coming out in February entitled “The Complacent Class: The Self-Defeating Quest for the American Dream.” I understand it is available for pre-order, so you should check that out. I’m a huge fan of Tyler and his work, so I’m really honored and pleased to be able to host him here today.

The format of today’s event will be as follows. Tyler will give 10 to 15 minutes of opening remarks on the topic. I will ask him a few questions to get the conversation started, and then turn it over to all of you to do the same. Today’s meeting is for attribution, which means anyone can cite anything that you, Tyler, or I say. This event may be partially about cellphones, but nevertheless please turn yours off. (Laughter.) It is awfully rude when it goes off when people are speaking.

And with that, I will turn it over to Tyler. Thanks again for coming.

TYLER COWEN: Thank you. Thank you for the kind words.

Five or 10 years ago, a lot of economists would not have been convinced if you tried to argue there was something special about a manufacturing job in terms of either productivity or political economy. Today in Washington, this is one of the main things people talk about, for reasons that are rather obvious. And my paper is asking the question what is special about a manufacturing job for emerging economies. And in a world where a lot of manufacturing jobs are going away, what, then, does the path of economic development look like?

So the old recipe was to do something like what Japan or South Korea, to varying degrees Hong Kong, Singapore, Taiwan did, and that is to export a lot, to export manufactures, and then climb up the value chain, and in essence become a fully developed or nearly fully developed economy with actually a relatively even distribution of income, and this did indeed work for those countries. But we found as automation has preceded, as smart software has become more powerful, this is much harder to do. So you have a country like Brazil, where manufacturing is a share of employment that peaks at about 13 percent, and then it’s declining. South Africa has been deindustrializing in terms of employment share for quite a while. Most emerging economies have been. I’ll get to the exceptions in a few minutes. But if it’s the case that manufacturing now is increasingly detached from labor, as has been the case in Ohio, Michigan, in various parts of this country, if you’re trying to pursue an export-oriented model of economic growth, even if you can export, it simply won’t create a middle class in your country the way that it did, say, for Japan and South Korea. So that path to economic development in most cases, I think, is largely gone.

There’s a deeper problem, and that is, to the extent manufacturing doesn’t hire much labor, you need to ask, well, why put your plant in Vietnam anyway, or why consider Bolivia or Nigeria if, say, they had better infrastructure. To the extent wages don’t matter, the low-wage advantage of a lot of emerging economies, it simply isn’t so relevant anymore. It’s a striking fact that today China, which is still mostly a lower-wage economy—China is the single biggest user of industrial robots. So when you have a low-wage economy taking the lead with industrial robots, that’s a sign that maybe you can’t count on manufacturing jobs to build up China the way it did South Korea, and that’s simply a question of when China’s industrializing.

Now you might wonder why are manufacturing jobs special as an economic category. There’s nothing in microeconomics that implies a manufacturing job is somehow different than, say, a service sector job or a job producing natural resources. But it does seem empirically, at least in quite a few cases, manufacturing jobs are special. And we learned this at our peril in the immediate election. But I still don’t think we have a really good understanding why that is.

One reason I can think of is—(inaudible)—disease; that is, it’s often the case productivity rises at a higher rate in manufacturing sector jobs than service sector jobs. To some extent, that’s just begging the question. Well, why is that the case? And again, I don’t think we understand that very well as economists. But there seems to be something about a lot of manufacturing jobs where, A, they don’t necessarily require a lot of fancy education up front, so they boost mobility; you stick at them for a fair number of years, say maybe 10 to 20 or more; so your employer has an incentive to invest in your talents. Productivity does rise in those jobs at a higher rate. Even in the United States, they seem to pay a premium. It’s easier, on average, to export manufactured than service goods, so they’re less prone to rent-seeking; that is, the company has to actually make something that people in a more or less free market want to buy. That imposes a useful kind of discipline. And most service sector jobs fall short in some of those regards.

And I think another big factor is a political economy one. One very clever thing South Korea did, whether or not they understood it, but the development path they took, infrastructure was a pre-investment, but they also invested in having interest groups that would support the further building of infrastructure, so the same with Japan, the same with coastal China. If you’re building up manufacturers and you’re creating commercial interests that are selling abroad, they will of necessity push your government to build a lot of useful infrastructure, and that will transform your country.

So South Korea today looks nothing like the South Korea of the early 1960s, which then had a per-capita income lower than that of Africa. So it knits together your country, it smooths transportation costs, it modernizes, it changes the physical environment. If you’re exporting services, as is commonly the case in, you know, say, Hyderabad or Bangalore, you’re more likely to find that done in, like, standalone, almost medieval-style moats that are walled cities that internalize a kind of infrastructure which is not generally available to India as a whole—they’ll have their own power systems, water systems, maybe internal roads within the moat—but you don’t quite see India becoming the next South Korea in the same way. And much of Africa, you see very specialized kinds of infrastructure development, like can we get this mineral resource out to China? But, again, it doesn’t seem to tie together the whole country or the whole continent the way we found happening in parts of Northeast Asia. So I think the connection between manufacturing and infrastructure is quite key, and I think we can imagine future development paths, say, for parts of South Asia or much of Africa where they do actually grow at reasonable rates. Maybe they average 4 percent. They got—get a lot of new technologies, new consumer goods from the West, if not for free, but at very low prices. They’re much better off, as is already the case in most parts of Africa, but they never start looking like South Korea; that is, the physical appearance remains fairly ramshackle. People consume much more information, they rely less on physical transport, they rely less on manufactured goods.

And the path for future development I outline is one that I call a cellphones instead of factories, thus the title of this talk. So imagine that instead of exporting a lot of manufactured goods, a country like Nigeria, it becomes very open to cheap consumer goods. More and more, we’re producing consumer goods not at constant returns to scale, but at increasing returns to scale. In an economic model, increasing returns to scale means a lot of price discrimination, so Nigerians can buy cellphones really very cheap, and that’s going to get much, much cheaper. So there will be a lot of increases in real wages and welfare in Nigeria, but much of that will come through the consumption side. It will be a strange kind of consumption-led growth. There will be this massive automation, a lot of reshoring in the United States because relative wages don’t matter so much. We’ll produce amazing things in enormous quantities. We’ll export them to the rest of the world—cheaply, in the case of the poor countries. They’ll, say, have real income growth at 4 percent a year, but always look somewhat ramshackle. Moving to an urban city will no longer be the path to riches. One already observes this in much of Africa. The people in the cities don’t necessarily live so much better than they did in the countryside, which is contrary to the path of China, or earlier South Korea.

And just development—economic development will take very strange forms and will probably never reprise those South Korea/Japan/coastal Chinese models ever again, is my suspicion. This paper is not prescriptive. It’s really descriptive and predictive. It’s giving a framework for how to think about growth changing. So it’s thinking about the future.

A remark I would make is this. To the extent the deindustrialization of employment proceeds, while we here in America talk about Detroit and Ohio, by far the biggest impact is on emerging economies. This will transform the future course of the world. But it also will, over a longer time horizon, lead to a picking apart of manufacturing bases in places like South Korea or coastal China. You already see there some outsourcing to, say, Vietnam or the Philippines. So countries that have already industrialized and built a middle class will probably see this continue to be picked apart somewhat, unless you’re optimistic enough to believe that in service sector jobs you’ll see comparable rates of productivity growth, as we’ve seen in the past in manufacturing jobs. So I think of this as a kind of average is over world. So people sometimes ask me what’s your vision for the future of China. I think some portion of China, well under a half, will become fully developed and have a Western or West European standard of living and will do just great, and then I think a much larger portion of China will be like the nonbillionaire sections of Mexico, which are actually better off than many people think, but you wouldn’t call them fully developed, and that will be because of more income going to capital, deindustrialization of employment.

And a bunch of countries were fortunate to get rich in a relatively egalitarian era. The emerging economies today, they’re getting rich in a not very egalitarian era. But in the longer run, actually we will end up copying them. And you can already see a lot of signs that our relatively egalitarian distribution of income has been falling apart, unraveling, more going to capital, more going to laborers who have hard-to-replicate skills. There’s more I could say, but why don’t I stop there and we can open for comments and questions.

BOLLYKY: Great. Well, thank you for that. That’s provocative and interesting. And so you painted a vision for the future for lower-income nations—and forgive the pop reference—sounds a little like “Star Wars” to me. And what I mean by that is in your vision of the future the things that matter most to people traditionally— food, housing, those kinds of goods—are quite expensive, the infrastructure is ramshackle, the environment is peri-urban, and domestic inequality is high. On the other hand, things like cellphones, ideas, robots and automation in manufacturing, and lots of consumer technology is quite cheap and widely available even in poorer countries. So this sounds a lot like that science fiction of the 1970s.

And it also sounds a lot like a recipe for instability and hostility towards the empire-like or more developed nations. I wonder if you agree with that. And the second thing I wonder is what do the investments need to be made to nudge that somewhat dark future in a more positive direction. It seems to me like investment in technology or software-led or service-led growth needs—education, for instance—maybe increased trade in digital services. But what do you see as being necessary to move this in a more positive direction?

COWEN: There’s a number of different questions in there. I think my model is cheerier than the “Star Wars” scenario. There’s no Death Star and there are also no Jedi. In “Star Wars,” in a funny way, information is always scarce, so no one knows where anyone else is living. Everyone has to be found. You can never send anyone an email. You can’t do—like, you know, Luke Skywalker can’t do a Google search. Who was my father? (Laughter.) It comes up that it’s Darth Vader. And I think that will make a big, big difference. So I think physically this future will look quite ugly in a way much of “Star Wars” does, but I’m by no means convinced people will be unhappy. So people will be connected to each other very intimately and with tight bonds. That doesn’t always lead to happiness, as we see on Facebook, but it will be a very human, almost overly empathetic, overly involved way of existence, where you rely on that for happiness more than some physical goods. The main reorientation, I think, that will be needed, it’s—will be how people think of their jobs as a source of status and social placement. That will have to change. So the way an autoworker thought of a factory job as placing him in the Detroit of 1976, and when that is lost, there’s some displacement, alienation, ongoing discontentment. That’s a significant problem. I’m not sure countries who haven’t been there yet will feel that in the same way.

Now will the poorer countries resent the rich ones? I don’t, in general, have a good understanding of which countries resent other countries. So, if you look at the United States, we’ve treated Mexico very badly in the past, taken huge parts of valuable territory from them, yet there’s absolutely no real Mexican terrorism against the United States, even though we treated them worse than almost anyone else. If you look at various polls, the countries that like us the most, I see Honduras, Nigeria, and Ghana. Very often, polling is extremely pro-American. You may all have theories about this. I have no grand theory of why they like us. Maybe they don’t see us that much. (Laughter.) But it may have something to do with some English in the parts of the country, but they don’t—they don’t necessarily benefit from us very much.

So, in general, when there’s political discontent, the simple recipe when inequality goes up, people think there’s the next thermidor, riots, revolution. I think, empirically, that’s not a regularity. To the extent we see a regularity, it’s that inequality leads to disengagement and disillusion. I would even say that’s a weak correlation, not coming out of a clear model. So I don’t think there’s any particular reason to think international relations will be hostile or unhappy. I would just say we don’t know. But I suspect they’ll mostly be driven by other factors. So I’m somewhat more optimistic. This is not the “Star Trek” future, but I don’t think it’s the “Star Wars” future either.

BOLLYKY: Great. Your paper focuses on case studies that are largely middle-income countries, and many of them upper-middle income countries with big wealth disparities of the sort that you described with China. Does this future look at all different for poorer nations—thinking of Ethiopia or Bangladesh or Kenya—countries that have had pretty explosive economic growth recently, although some of that is perhaps commodity-driven. What do you—what do you see in the future for them?

COWEN: I think of Ethiopia, Bangladesh and Kenya—it’s funny you mention those three—those are three places I’m relatively optimistic about, and I think they’ll grow pretty rapidly. But again, with high inequality built in from the start, and no chance of a real South Korea path. What I find interesting are the two nations that seem to be exceptions to the deindustrialization of manufacturing, and in both cases there’s a measurement issue, so I put them forward as examples with caution. But one is China, which it may be deindustrializing somewhat, but it’s nothing like South Africa, Brazil, or India. There’s still a lot of manufacturing employment in China with no really good numbers that I’m aware of. And the other is Mexico, which peaked at 25 percent share of manufacturing in employment. That was only a few years ago. Now they’re at 23 percent, which is relatively high—not as high as the U.S. ever achieved.

And you ask why have China and Mexico to some partial extent beaten back these forces, and I suspect it’s scale. China is enormous, does things at enormous scale. That helps them continue to export. Mexico is not itself so large as a country, but they’re free-riding upon the broader unit. They’re like a manufacturing enclave almost within the United States/Canada, and so they’ve kept their manufacturing employment quite high. So when you think about why are Mexico and China somewhat exceptions to the deindustrialization of employment, and then apply those reasons to Bangladesh, Kenya, Ethiopia, I don’t see any of those three countries, or indeed, any other you could name as being likely exceptions the way that Mexico and China are. I think they’ll fit the general pattern and be like India, Brazil, and South Africa—same with Vietnam.

BOLLYKY: Yeah, I imagine the two examples you provide are situations where there’s effectively a large consumer market, as you suggested, captured domestically. So China, even if its export fortunes sways, it can shift to more domestic consumption. As you mentioned, Mexico obviously serves the U.S. market.

COWEN: Right.

BOLLYKY: And that provides, you know, even with the shortening of supply chains, you still have some good stability in those types of places. But, I’ve asked a lot of questions. Let me turn over to the audience. If you flip up your placard, I will call you in the order that I see you. I would just ask that you state your name and your affiliation and please make your question actually sound like a question.

Thanks, Ted.

Q: Thanks, Tom. Ted Alden from the Council on Foreign Relations here in Washington.

I want to push a little more on the sort of manufacturing equality piece, because I would think if you look back in 19th century Britain, for instance, in the textile mills, they were not equality—that was not equality-generating manufacturing. A lot of that came later with union organizing, and then I think the unions were weakened in a lot of ways by globalization because companies had options, and so the labor unions got very weakened. I wonder in this new world you’re sketching out, kind of more services-dependent growth, is the possibility—does the possibility for labor organizing come back on the table? Is there reason to believe these are less mobile industries that workers might be able to organize and fight for a higher cut of corporate earnings, or is that not plausible in the future you’re sketching out?

COWEN: I tend to think it’s not plausible. In this country you don’t see many nongovernmental examples of successful service unions. But I also would compare level effects to rates of change. So unions give you a level effect. You can debate how large it is. In the U.S. it seems to be a one-time 10 to 15 percent wage boost. Even then, that’s only for those who get jobs. Fewer people will get a job given the higher wage. So it may itself be inequality-increasing. But even putting that aside, it’s a one-time effect, and differential rates of productivity growth eventually overwhelm it. Any rate effect will eventually overwhelm it. So unless you think unions can compete against rate effect, in any long run model they shouldn’t matter very much, and I tend to think they won’t overturn any of the mechanisms I’m talking about. So you have Western Europe, which has a special place for unions, and I tend to think of that as unsustainable, for better or worse, and that itself being picked apart. So I think we’ll see a future where unions don’t matter very much.

BOLLYKY: John.

Q: John Yochelson, a Council member.

Let me ask you how you think that these changes will affect the way in which nations define their interests globally. I am struck that the United States, for example, has continued to define its national interests in terms of a framework of institutions, alliances, and multilateral institutions that we helped shape. And the Obama administration, to my mind, stands out as a very good example of trying to maintain and at the—and adapt to that framework. The world that you described strikes me as one in which nations may in fact wind up defining their national interests in very different ways from today. What are your thoughts about that?

COWEN: That’s a very good question. I think there will be more nationalism, less interest in multilateralism. The United States already is on a path to becoming energy self-sufficient. This is in part due to aspects of automation enabling fracking and other developments. I think we’ll see a kind of fortress NAFTA or fortress Americas develop. Mexico will become more important to us. I’m actually relatively optimistic about Mexico and the U.S.-Mexico relationship in spite of you know who. But I think the move toward nationalism and the collapse of certain kinds of multilateralism—you see it already in headlines every day. And there are even institutions such as the World Bank, the IMF, which haven’t so directly been touched by this, but I think they’re highly vulnerable. More people have ceased to believe in them—not for any good reason. It’s just not emotionally salient to them than actually we’re aware of, because they’re not on the table. The WTO, the European Union, I see—TPP, which I very much favored being, at least for now, off the table—I see so many points where this has already happened. You can think of our model as a prediction about the future, but you also can think of it as a description about the present. I started writing this almost two years ago, and parts of it have come true at a much more rapid pace than I even had imagined, much less expected.

BOLLYKY: Great.

Marc.

Q: Marc Levinson of the Congressional Research Service.

If you consider why manufacturing is where it is, there have been various theories over time—OK, the historical theory, the auto industries in Detroit because they used to make carriages there—based on transport cost considerations, based on labor cost and availability (and separation ?), based on trade barriers. As you look forward, what would you think would motivate locational decisions for manufacturing if none of these factors much matters?

COWEN: Surrounding infrastructure, rule of law, just location, proximity to where you’re selling to. The gravity equation still holds in international economics. So I think this will favor North America. I think there will be several dominant economic clusters in the world—something like NAFTA; parts of Northeast Asia centered around coastal China and Japan and South Korea; what I would call the European super companies, which I think will do very well, even if their underlying economies don’t always do well.

And I think we’ll see a kind of average is over phenomenon where regional convergence will become even less of a dream. You already see within the United States we had regional convergence and urban convergence for decades, and now for over 20 years we don’t have it at all. And no one really talks about, oh, Louisiana’s going to catch up on Silicon Valley. If you try to say that in polite company, you’d have to argue very hard to get someone to take it seriously. It just doesn’t really seem like it’s happening. So to think that’s a broader trend for the world in general, you see within the U.S. and globally a new category of super firms that are much more productive than other firms. So the distribution of firm productivity, it’s not some kind of smooth curve anymore. There’s super firms and there’s everyone else. You can even go somewhere like Singapore, which, you know, has the wisest of economic policies from my point of view—the super technocracy—and you ask them, well, what’s the rate of productivity growth in the service sector in Singapore. In some quarters, it even measures as slightly negative, but basically it’s zero. So the optimistic scenario is that we manage to make service sector growth productive as manufacturing sector growth has been. But otherwise, I think you’re going to get some fairly extreme clustering and stronger pressures for migration, higher barriers to migration. Again, these are all things you see in earlier forms today already.

BOLLYKY: Great. That is actually what I wanted to ask you about on the migration point, something that isn’t covered that much in your paper. This notion of factory Asia or factory North America or factor Europe is an idea that Richard Baldwin has been talking about for a long time. But the lack of opportunity in the countries not attached to these factory clusters for lower-skill populations to get higher wage-yielding jobs seems like it would create an enormous amount of pressure for migration. With rising opposition to immigration and without that escape valve, what does that mean for those non-factory cluster countries? Is that more instability?

COWEN: Again, I don’t know if anyone in the social sciences is good at predicting instability, but we are entering what I call the cargo cult future, which will have some very appealing aspects. So if you live in a poor country which has not even great rule of law, but just some set of institutions and some expertise, I think your economy can grow at 4 percent. So you look at Denmark. How rapidly did Denmark ever grow? Rarely in its history did it get much above 1.9 percent a year. They just stuck at it for a long time, and now Denmark is great. So you have countries that don’t feel like big successes and they’re growing at 4 percent a year, on average, with more volatility, and they’re just getting incredible consumer goods—again, not quite for free. But the coming of growth through greater consumption opportunities is far stronger than it was in the 19th century, and I think, again, this is because of increasing returns to scale. If everything is information, at the margin, information is free. The important thing about an iPhone is the—either the information it sends or the information embedded in it, and both of those at the margin asymptotically will approach being free. So I think the notion that you can develop really quite a bit without the sort of extreme work ethic that South Korea and Japan had, where people made enormous sacrifices, brutal, led brutal lives to pay for their country’s economic development, to think that in the future many, many countries will get all that without having all the right reforms and without having to work so hard, and still have 4 percent fall into their laps, that’s a huge gain, and we shouldn’t underrate how good that will be. That’s the bright side.

BOLLYKY: Paul.

Q: Thanks. I’m Paul Isenman. I’m a development consultant, used to work at the OECD and World Bank.

Fascinated by what you said. It’s very compelling in many ways. I want to ask you to comment on—from the developing country’s point of view on the extent to which what you say doesn’t—shouldn’t imply overinvestment, as it were, in education.

COWEN: Mmm hmm.

Q: From what you’ve said, it sounds like, well, if you want to deal with questions of income growth, you want to deal with questions of adaptation to a changing world and resiliency, you want to improve health—and certainly a lot of evidence on the impact of education on health—you want to reduce chances of internal instability—and education can cut both ways, but there’s a fair bit of evidence that in general it goes more toward the good institutions—you want to equip people so that they can migrate to the extent that they can, wouldn’t an implication be that, like Korea, in fact, which invested a hell of a lot in people, social as well as physical infrastructure, that developing countries ought to be really pushing very hard on education? And I wonder if you would comment also—what you said on urbanization, that it would be much reduced, sounds reasonable—except that wouldn’t people continue to go to cities partly because of the services that are more abundantly available, particularly in poor countries, in the cities, and also the opportunities for specialization? Could you comment on those?

COWEN: In reverse order, I’m not sure urbanization will decline in numbers, but urbanization as a path to wealth.

Q: Oh, OK.

COWEN: I think that wage differential in my model is a lower one.

Q: Right.

COWEN: So people move into Lagos all the time. It’s a huge city.

Q: Right.

COWEN: But it’s not like moving into Seoul was, say, in 1976.

Q: Right.

COWEN: I agree with your remarks on education. I think it raises the question: what kind of education, though I think there’s significant underinvestment in education in most emerging economies, but you see at least parts of some Middle Eastern economies that seem to overinvest. They have all these useless engineers running around. Now, I don’t think the answer is less education, but they’re somehow not understanding education in the right way. If you think of more and more jobs as being automated, you might actually consider orienting a lot of education more toward the humanities and thinking of it as an investment in your future institutions, your people’s cultural understanding of what they are, unity, stability, and it may imply something quite different than the current obsession: Everything should be STEM, everyone should learn programming, everyone be an engineer. I wouldn’t so quickly leap to that conclusion. It may in fact imply the opposite, that you want education to help people enjoy consumer goods and have a stable political economy and have some kind of rich cultural understanding of the cargo cult coming their way. That’s at least possible.

BOLLYKY: Great. I have the gentleman there. I can’t read your placard.

Q: It’s Matt Devlin.

BOLLYKY: And then I have—Molly, are you still asking a question, or are you—

Q: My question’s about urbanization.

BOLLYKY: OK, great. And Robin next. So please go ahead.

Q: Matt Devlin with Uber.

Tom asked you to distinguish on wealth, between more and less wealthy countries and how your thesis would play out in both. I’d be keen on your thoughts on how demographics plug into this, because obviously the adoption of automation looks very differently in an aging society versus a youthful society, and just how you—how you think about that.

COWEN: I don’t know if we’ll be able to automate caring for the elderly. That’s hard to predict. I think if we do, it will take quite a while. So in societies that are aging more rapidly than we had expected—places like Iran, Algeria—the predominant job may be caring for the elderly, sometimes through family structures for an implicit wage, other times explicitly. I worry that that doesn’t have much in the way of increasing returns. So a nice thing about manufacturing is there’s often some kind of spillover learning. You make one thing, you create a pool of skilled workers, they go on and start their own companies, they learn other things, and you see evidence for that in a lot of histories.

But when it’s such a significant job, taking care of the elderly, it could just be my imagination is too limited, but I fear there aren’t that many spillovers from a kind of babysitting. And you’ll have people that work, they’ll earn some going wage which, you know, will compare to the wealth of their economy. But in terms of boosting future growth, I suppose I’m somewhat pessimistic. So this could mean demographics will matter more than we thought, because if you end up having to spend too much of your economy in percentage terms taking care of your elderly, that could be actually a bigger problem than we had thought—unless you think we get to the point of robots that can do that.

BOLLYKY: Great.

Robin?

Q: Yes, sort of pushing further into the future, when you looked at the deindustrialization and so on, I’ve heard people say that, number one, we could get to a point where there simply won’t be enough jobs. You’ll have more people than jobs, and that, you know, there won’t be enough capital to absorb whatever labor there is, and so on and so forth, so that you get to a point where the state is paying people not to work and some people work and some people don’t. But, you know, this is a worrying concept to me, and I’m just wondering whether your model or other areas in which you work enable you to reflect on that.

COWEN: I would frame it in terms of wages rather than jobs. So there’s always more jobs at some wage. But an implication of this model could be, you could have very long periods of time where wages simply don’t go up—ever.

Q: Yeah.

COWEN: That’s quite to the contrary of how we usually think about development. We think if you do some list of things the right way, you’ll get steady wage growth.

Q: Yeah.

COWEN: And it could just be relative to machines or other methods of replacing people, people just don’t get that much more productive each year. And it could be that, you know, the ongoing form of wage growth, including within the wealthy countries, is you just wait for new stuff to be invented, but you never really get a better job. So you’re always a gardener, you always care for the elderly for, say, 200 years. Maybe someday a robot can do that, but that’s science fiction dimension, at least for a long time. Robots run factories, but they can’t do gardening. And, you know, talking to elderly people, making them feel better, or monitoring their medication. And those are jobs for long periods of time. This is actually like most of human history. We regard it as so strange. It’s the human norm. What’s different is we have these cutting-edge super firms with high TFP that will throw off the cargo cult goodies our way, and those will grow at some rate, and our well-being will grow at that rate, but will always be a gardener. I think that’s a quite plausible future equilibrium for a pretty big chunk of humanity.

BOLLYKY: Is one difference that people are living a lot longer. You are in a different era of human history is—I mean, technology is better, you’re more aware of other societies, you’re more aware of the world, but people are also alive a lot longer and not as beset by illness and many are not just trying to scrape by, feeding yourself and your family. And I have to say—and maybe I’m too American in my perspective—but this notion of a future without striving, but you can get cheap movies instead, it sounds monstrous. (Laughter.) And I wonder, you know, isn’t there a difference in the likely acceptability of this notion in the future than in the past because the human condition for an increasing number of people has changed.

COWEN: Well, there will always be striving in the superclusters—we happen to live in one, the Northeast Seaboard—and the strivers produce some enormous external benefit for humanity. Again, the question of status expectations: Can the people who always work as gardeners and who sit back and wait for free stuff, and maybe don’t feel very much in control, when enough of the world is that way, what will their social status be? Will they feel left out and looking for some kind of unpleasant political alternative, or will norms evolve so that the people who were the gardeners waiting for the cargo cult of new fun cheap movies and video games, whatever it will be—they become like the Detroit autoworkers of 1976 and they take quite a bit of pride in that, because that’s what most people do when they belong to gardener clubs and whatever else we need. So I find too quickly people assume that those who are quote-unquote “stuck” will feel terrible about this and will rebel.

When we had all these manufacturing jobs in Detroit, at the time so many people wrote how horrible these jobs are, we must get rid of them, they’re so dehumanizing. It’s only a matter of time before people rise up and toss away the overlord factory managers. And now that they’re gone, it’s like, oh, my goodness, they’re gone. So what exactly people are going to rebel against, I find all claims about this question extremely weak. I don’t think we know. But it is not my presumption that this future is unstable. Right now, most of the world is stable. Short of major war, most places are stable in most periods of history, and that’s my default, very loose, not tightly held Bayesian prediction.

BOLLYKY: Yeah. So the one thing I would say is different is, that most gardeners and most factory workers are doing what they do for their kids. That is the difference. The lack of expectation of a better future for your children may be more difficult to bear in are when people are living longer, not just merely surviving and you are more aware of the rest of the world and what’s available. That seems a little bit different. So while there are lots of people both domestically and internationally that don’t expect a better future for themselves, but I think it’s a different calculation not to expect a better future for your children and their children.

COWEN: Right. But there’s two separate questions. One is, do you think that your working harder will give your kids a better future? And that may be no. The second question is, will the ongoing arrival of cargo goods give your children a better future? And that will be yes. So you won’t be gloomy about your kids, but you may feel it’s out of your hands. So it could be that work ethics weaken. You don’t get how South Korea and Japan were in their highest growth go-go years. And there’s some loss there. But in some other way, I find that quite humane. I find it quite horrible, what those people had to go through. It was in their case for the better. I’m glad they did it. But if the future is countries growing at 4 to 6 percent and no one having to work like that, there’s also some very real good in that. And maybe the notion that the cargo takes care of your children, people might be fine with that. I don’t know.

BOLLYKY: Alexander, then Donald, then Constance.

Q: I’m Alex Watson from Hills & Company.

I want to push you a little bit further in your response to Robin’s question. Do you think that—do you foresee out there a delinking of income and work—not just having gardeners and not getting paid very much, but you have a certain group of people that is working and generating income and other people that are not generating any income that are receiving the benefit. And we’re already partly that way. When you look into the future, you see more and more retired people that are going to be living on income that they’re not earning at least then. They may have earned it in the past. And there are other people, as welfare programs expand—you talk about a place like Louisiana where 44 percent of the income is given by the—of the state budget is—(inaudible)—out of Washington, things like that. So you take that out to the future, where you—psychologically traumatic to delinking income from work.

COWEN: Mmm hmm.

Q: Second question, if I—if I may. What are the impacts of your speculations on international trade? Do you think that by relocations of manufacturing and changing the way that you’ve suggested, we’ll have less international trade, and would that then have a negative impact on the need for greater infrastructure development?

COWEN: In reverse order, from 1990 to 2007, international trade grows at 3X GDP, globally. That won’t happen again any time soon, maybe never. That was an extraordinary period. We didn’t quite realize maybe at the time how special it was. Right now, trade is growing close to the rate of growth of GDP, maybe somewhat less, I understand. There’s some measurement issues. But I expect trade will grow less rapidly than global GDP, looking forward. And this will change multilateral organizations. It will change how we think about the importance of trade. It will change foreign policy. It’s scary in some ways. It will mean greater robustness, though, for at least some countries not to be so dependent on trade, most of all the U.S.

I worry a great deal about the political economy of a world where so many people are retired. It’s a very different concern than what’s in my paper. But when you simply have so many voters—and they do vote—and I think older people, they vote much cynically than younger people, so their votes can be bought by transfer payments. Young people say, oh, Obama or I’m for—you know, whoever it is you’re for, and it’s hard to get them to budge. The elderly are much more cynical, maybe in a wise way, but not in a way that’s good for governance. I don’t have an answer to that. You might ask, well, how does that interact with what’s in this paper? I’m not sure. But I’d say it’s more a separate worry I have. I think we overinvest in life extension. We’ll never stop doing that. And we’re our own worst enemy and we’re not really properly biologically programmed to deal with a world where maybe a lot of people can live to 115. I don’t have answers for that. Let’s root for robots being able to take care of the elderly. (Laughter.) It seems to me a little science-fictiony, but surely at some point it will come. And maybe it’s just a box that talks to you and then tells you to take your medication, and like your toilet monitors what you put out, and takes care of you, and we can save on healthcare. And you can imagine it doesn’t have to be a robot in the “Jetsons” sense. You can imagine some more local, less science-fiction-sounding interventions that could make retirement a lot easier to handle, just, you know, breaking the Turing Test barrier, for instance.

Q: But can you see absolutely separating income from work for the working nonretired element of the population, or does everybody become retired?

COWEN: Well, I think we’ll separate income growth from work for more and more people, but I don’t think we’ll any time soon separate income from growth. And it’s funny. When people evaluate things, they too often look at growth rates rather than levels when they evaluate a politician before an election. They ought to look at the level, but they look at the recent rate. We’re not sure why they do that. So if people worry too much about the rate, this could be destabilizing. If we could train them more to think about the level, like, look, your level’s fine, you’re a great gardener, you get your cargo cult package every month, each time it’s more fun, get used to that, and don’t feel like a failure, I actually think we can shift cultural norms in that way.

BOLLYKY: It’s interesting that you imagine a future of robots taking care of old people in wealthy countries instead of migrants, given the age structure differential between lower-income nations and high-income nations.

COWEN: Sure.

BOLLYKY: Do you—do you think that will persist? People would continue to prefer robots to all the ample populations without jobs that you describe?

COWEN: Well, I think voters will prefer robots. I think people would prefer other individual people. But if you look at birth rates, a country like Mexico, it’s remarkable how quickly that rate fell. Or even China before the one child policy, it fell remarkably fast; a lot of the Middle East. Anywhere but South Africa—sorry, anywhere but South Asia and Africa, we will not really be above replacement in much of the world. So how many countries want to take in large numbers of black African immigrants? I would be very happy to do that myself, but I guess I think we’ll end up with more robots and lower levels of African immigration, and we’ll have something like NATO patrolling the Mediterranean and setting up, you know, a new Berlin Wall, but facing the other way. I find that unfortunate. I think it would be cheaper and more humane to take in more people from higher birth rate countries, but they will be people with different skin color and culturally, linguistically generally quite different, and I see the trend really going in the other direction. Trump may issue more visas for the proverbial Swedish engineers, but other parts of the world, I think barriers are going up.

BOLLYKY: Donald.

Q: Yeah. Thank you. Don Daniel, Georgetown University.

I’m interested—you know, you mentioned several times it seemed that, you know, incidents suggest to me that the people who are talking in terms of entropy may be right; in other words, that there is less, let’s say, ability to be able to control what’s going to be going on in the world, within nations, within subgroups, that kind of thing, and that I don’t think bodes well, you know, really for the future. And it strikes me, cargo cult is a very weak read to base, you know, somehow or other the future’s going to be OK because we’re all going to get these cheap goods. You know, somehow or other I find that human beings, that’s not going to be enough. You know, and if we turn into that particular kind of world, my sense would be, I think I want to check out ahead of time. (Laughter.) You know, it just strikes me as a very weak route. You talk about the IMF not being—no longer, let’s say, as attractive as it was, you know, the World Bank and all—all of these—you know, the European Union—all of these structures. And we already see in terms of what’s happening relative to the election year in this country, the elections in Europe and other places—so I find for instance things like cargo cult and 4 percent real growth is going to continue kind of independent. And you say we’re not even going to have the right reforms. We’re not going to have the good things, but we’re still going to get 4 percent real growth. So I’m having a lot of disconnect in my head in terms of, you know, your argument.

COWEN: Well, plenty of Africa and South Asia has averaged 4 percent or higher with very bad governance, so we know this is possible. Now, you might think there’s some reason it can’t just continue, but we’ve had it for a while now. Some of it’s resource-based, but it seems to me the 8 to 10 percent is resource-based. And you take away the resource-based growth, you still see decent growth in a lot of countries which have pretty bad institutions. And I don’t see why that has to end. It will obviously diminish as they get closer to the frontier, and Denmark and the U.S. will not be doing 4 percent growth, but the empirics there seem to show it’s possible.

Now let me speak out in favor of the cargo cult. I mean, I’m there already. Like, what’s the biggest, best advance in my life over the last 10 years? It’s this. Did I get out there and make this? No, they sent one to me. I had to pay, but my consumer surplus is remarkable. I don’t feel bad about that. I don’t feel alienated. I get all other forms of cargo cult. Netflix is cargo cult. TV got a lot better. Travel in some ways is easier. I’ve had an enormous amount of cargo cult, and I don’t—as has probably everyone in this room. I don’t see that it has to be unsustainable. Retired people don’t usually get big increases in their incomes—sometimes they do. They’re already cargo cult. But it seems to me there’s a lot of data that retired people who are relatively healthy are pretty happy. So the notion that cargo cult has to be culturally corrosive and in some Hegelian sense there won’t be the recognition and we’ll all be out in the streets marching or voting for goodness knows whom, I consider that unproven and not the obvious default assumption. The obvious default assumption is people love getting something for nothing. They demand it at the voting booth all the time, when they can’t even get it there. And when it does actually come, they’ll be fine with it.

Q: (Inaudible.)

BOLLYKY: I wonder if the difference isn’t though somebody from your situation in life, being a member of the cargo cult, versus, again, people in a different economic situation. I wonder if the last U.S. election doesn’t to some extent disprove this notion where lots of people have Netflix, some—lots of people have access to these cargo goods, but there seems to be an awful lot of unhappiness and dissatisfaction and people marching in the streets. They just tend to be—tend to be people from lower economic—lower economic status with worse job prospects for them and their children than perhaps many people in the room.

COWEN: Again, these kind of predictions are very hard. I’m just talking about my defaults. Don’t hear me as making firm predictions. But I see many places in, say, East Africa, South Asia—and I’m putting aside the narrow resource-based growth; that’s different—but many places growing at reasonable rates, often fairly high rates—Bangladesh, Kenya, Ethiopia—and it’s not—those are not stable places by any means, but if you compare their stability now to, say, the ’70s, when they got much less cargo, they don’t seem to me less stable. So it seems we have poor places, they’re growing, they’re getting a lot of cargo, they’re still unstable—partly for other reasons. They’re actually more stable than they had been. That’s—a crude extrapolation of that for emerging economies into the future, again, strikes me as the default—again, not a firm prediction. But I don’t see why you might firmly believe the contrary.

BOLLYKY: Great.

Constance, you have the last question.

Q: Without too much time, but moving ahead from what you’ve just said—oh, Constance Freeman, Syracuse University—what would be your recommendations to governments and/or someone trying to promote better welfare in, let’s say African countries—so do we use that as an example—and they’re the ones really on the periphery here—based upon your model, what would recommend to them that they should do to maximize their benefits for their people within your model?

BOLLYKY: Great, and this will be your last two minutes, so please weave into your answer whatever final remarks you want to make as well.

COWEN: It’s very much a normative question, and it’s going to depend a great deal on the country. I’m a firm believer in education without thinking we can or should make everyone an engineer. I’m a believer that national boundaries really matter. And I’m not saying there’s a simple way to remix those. It seems to me in Africa we have a lot of national boundaries that don’t make sense. If we’re not going to redo them, I would think about how we might change norms so that people identify more with the national boundaries they have, to have stable national states.

I’m generally skeptical about resourced-based growth, and I think a lot of Africa’s main problems are, you know, burden of disease at very young ages, which is very fixable, improved a great amount, and kind of bad neighbor issues that once a bunch of good things start happening, a lot of other good things will follow. But as long as most of your neighbors are bad, it’s hard for you to break out of that trap.

So things now look more hopeless than they really are, because I think we’ll see some good things happening in different parts of Africa, and then that will spread in a contagion-like way, as it has in other parts of the world.

And also, sit back and enjoy the cargo. (Laughter.) And just realize, don’t, you know, copy the growth models of the past. They’re probably not going to apply. Be a little more agnostic and a little more humble, and see in which way maybe you can hook up with the superclusters and partake in some of their wealth. Some of that may just be tech transfer back home, like Africa having solar-heated homes that enable a lot more economic decentralization, or people living somewhat isolated but, you know, decently provisioned lives maybe in African rural areas by borrowing or getting almost for free technology from the West. It’s not a full answer, but those are just some points I would toss out. Thank you all for listening. I hope I have been some of your cargo cult today. (Laughter.) Thank you. (Applause.)